Are you planning to buy a residential property in a rural area with financing under an USDA insured loan program? While USDA rural mortgages provide a number benefits, many of the home buyers and borrowers in eligible rural areas are not aware of them. If you want to learn more about home loans available through USDA rural development programs, read on.
The loan process involved in securing financing through an USDA approved mortgage lender is quite similar in many aspects to the lending process followed during a conventional residential home loan approval. USDA mortgage process varies from other home loans in terms of requirements related to property eligibility and the borrower’s income evaluation.
Whether you are looking to purchase a new rural home or looking to refinance an existing rural property home loan, the flexibility offered by USDA loan requirements may be just what you need.
USDA Mortgage Loan Programs
Something about residential real estate financing and home buying that not many people know could change your life. In fact it could be the difference between not being able and being able to buy your own home. If big city, metro downtown life isn’t a requirement for you this little known fact will be important. First a question: Did you know there is financing available to purchase homes that fall within specific zip codes, lots of them across America, that requires only a very low or even no down payment? In fact this same loan can be used to purchase properties that need minor repairs and it is available to low to mid-income families. Read on because this information can be very useful to you.
Section 502 Rural Development Guaranteed Loan – Eligibility Guidelines and Lending Requirements
There are two main types of rural housing loans available for this purpose, offered by USDA. One of them is called a “USDA Direct Loan” which means the money is loaned by the USDA. The other is a “USDA Guaranteed Home Loan” and that is the one we’re most interested in for this article. Guaranteed means a mortgage lender or bank actually underwrites the loan and lends the money and the USDA guarantees against losses in case of a borrower default.
The USDA guaranteed mortgage (Section 502 Rural Development Guaranteed Loan) is actually made by regular mortgage lenders and financial institutions who are approved by the rural housing division of the United States Department of Agriculture. Yes, the USDA is the government organization who guarantees these loans. The government doesn’t actually loan the money to the borrower. This means to get the loan the borrower will select their own mortgage company to work with as long as they are approved to offer this type of USDA loan. The home buyer will need to complete a standard loan application and meet the loan qualifications specified by the USDA. If this is for you or for a friend, it will be nice to know that the USDA home guaranteed lending guidelines are not very different from a standard, conventional home loan.
Determining USDA Property Eligibility – Which Properties Are Eligible For The Loan?
The properties eligible for USDA financing under its rural loan program guidelines, however, are quite specific.
Rural areas are defined as “any area that is not urban” under the USDA property eligibility guidelines. The Census Bureau defines urban as “block groups or blocks that have a population density of at least 1,000 people per square mile (386 per square kilometer) and surrounding census blocks that have an overall density of at least 500 people per square mile (193 per square kilometer).” The long definition of rural isn’t quite that simple, but that’s the basic definition. If you’d like to read more about how the USDA determines which areas are eligible for their guaranteed home loan you can read more at the USDA ERS website.
Many single family and even multi-family homes outside of major cities are eligible for this type of financing. It’s easy to see if a home you are interested in buying can be financed by the USDA guaranteed loan program. All they need to do is visit the website and enter your address. Chances are good if it’s in a medium to small city outside of a major metropolitan area that it will be. If it’s in what is considered “the country”, a rural area, then it’s almost sure it will be.
When the word “rural” is used many people think about being far out in the country, small farms, livestock, and most properties fitting that description can qualify. In this particular case the definition of the word rural is simply “not in a major metropolitan area”. Before the decision is made whether or not a property may be eligible for the USDA home loan, it’s crucial to check the USDA website. All that is required is the property address.
USDA Borrower Eligibility Requirements – What About Home Buyer Qualifications?
Once the property has been determined to be eligible there’s a fairly simple and straightforward way to pre-determine buyer eligibility. Using the USDA’s income eligibility sheet simply locate the borrower’s state and Metropolitan Statistical Area (MSA). Then find the number of members of the household. If the total household income does not exceed the number in that chart then income eligibility is met. The next step is to visit a USDA mortgage lender or broker and make application for the USDA mortgage loan.
Many real estate investors would like to use the single family USDA loan to purchase their property. Unfortunately only the multi-family loan is available to investors. For the single family USDA home loan the buyer must attest that he or she will live in the property as their primary dwelling upon purchase. However the buyer may build, rehabilitate, improve or relocate a dwelling in an eligible rural area. The rehab and improvements must be made at the time of purchase and they can be a part of the financing.
Determining final buyer/borrower USDA eligibility will be the job of the mortgage underwriters at the specific lender. Each buyer should be diligent in providing the necessary documentation to the loan officer or mortgage processor as needed. Essentially all USDA lenders ask for the identical information to be submitted with the application. It is still possible that the underwriter may need to see further supporting documentation so the buyer should be prepared to supply it when asked.
What Other Types of Upgrades and Renovations Can Be Financed?
Home buyers with disabilities can benefit greatly from the USDA home loan because it will allow for special access upgrades. Anything that is attached to the property such as widened doorways, ramps, hand holds, and others may be financed. It can even be used to install special access fixtures and appliances. This alone makes for a good reason to use USDA loan financing when purchasing a home under these circumstances.
For the energy conscious home buyer it’s important to note that energy efficiency improvements can also be financed so long as they meet specifications of the loan, the local zoning, and are performed at the time of purchase. This may include adding solar or wind systems, replacing older HVAC systems, and even upgrading appliances so long as they are transferred with the property. In other words they can’t be financed as a part of this purchase but installed in another home.
Believe it or not it can also be used to finance site preparation such as grading, irrigation systems, sod, trees and more. And while not related to landscape most people are surprised to learn that this loan can cover the cost of installing broadband into the home provided the equipment is left with the residence.
USDA Loan Process – What Can A Borrower Do To Prepare For The Mortgage Process?
Everyone realizes the purchase of a home is a major investment. In reality it is the USDA lender who is “writing the check” for your residential home purchase in a rural area. This means to protect their company, the government’s guarantee, and the mortgage company’s investors, it’s very important to be thorough and accurate in verifying everything stated on the loan application. This means previous addresses, any recent name changes, length and location of employment, income tax records, banking records, and more. For this reason it pays to be judicious in submitting the information on the loan application.
Any borrower can help the process be much smoother by knowing the dates, income details, and contact information on previous employers. Generally only the employment for the last twenty-four months is needed. If there have been five different places of employment each will have to be verified. If one or more have gone out of business it will help tremendously to find the pay stubs from that time if there is no other way to verify. Also if the line of work changed, for example from a truck driver to a computer technician, it will be very beneficial to have the explanation for why that changed. In that example it could simply be that the borrower had been studying computers and recently graduated from vocational school.
Having the last two years of tax returns is important, too. The underwriter will want to see these, in most cases, to make sure there aren’t any huge adjustments between gross income and tax deductions. Unfortunately people who like to deduct everything they buy as a “business” expense will find it very difficult to qualify for a standard home loan. This means if the household income according to the pay stubs is good but according to the taxes is too low that will be an entirely separate issue.
How Long Does It Take To Close on a USDA Mortgage?
Every loan for purchase has a lot of variables. For straight purchases where the property is move-in ready and the borrower is easily qualified the time it take to close is quick. On the other hand if there are upgrades or renovations to be made the timetable can be greatly increased. In that case it will depend a lot on how long it takes to assemble all the necessary items like contractor costs, building permits, etc. Generally speaking there is no time difference from application to closing with the USDA loan as there is for any comparable loan.
The USDA application process comes first. Once it has been determined the property is in a USDA eligible rural area and the buyer meets income eligibility requirements and limitations they should complete the standard residential mortgage loan application. From that point the loan officer and processor at the USDA lender will work with the applicant to make sure the documentation is ready for underwriting. Generally at this time the appraisal will be ordered and those can require anywhere from a couple of days to a week to be returned. If there is rehab or renovation those costs and values must also be considered by the appraiser and may slow the USDA loan approval process slightly.
Upon completion of the USDA mortgage application and receipt of the finished appraisal the underwriter will work to make the determination as quickly as possible. Occasionally they may ask for further information about the property or the borrower. To keep the timetable short it helps to reply quickly with the information the underwriter has requested. Underwriting can take from several hours to a few days depending on how quickly certain third party organizations such as the borrower’s employer, the insurance company, and others who are critical to approval provide their response. For example an employer who takes a week or more to verify employment can cause a slowdown in the process.
USDA Loan closing Costs
All home mortgages have associated costs such as underwriting fees, appraisal fees, and attorney fees. Many types of residential loans require these costs to be paid separately but the USDA program allows much of the closing costs to be financed which means it is possible to purchase a home with very little to nothing out of pocket. Keep in mind these are not the same as the dangerous sub-prime loans which were issued up until the financial crisis in 2008. Unlike those loans USDA rural development home loans require that the borrower have a verified ability to repay the loan. What the USDA does with the guarantee is to indemnify the lender of up to 90% of the loan amount in case of borrower default on mortgage repayments. For this reason it is important to have verifiable income, assets, and credit history when seeking financing through a USDA approved mortgage lender. As always the best way for the rural home buyer to handle this is to apply for the loan and let the lender make the determination.
Choosing to use the USDA loan to cover the costs of upgrading or rehabbing the property can bring a whole new set of costs which can normally also be financed into the loan amount. This makes it a really good loan to buy distressed properties which would need a little work after the purchase. This requires additional appraisal services, contractors, and even building inspectors depending on the level of work to be done.
How To Get Started With The USDA Home Loan
In a quick revisit of the information above the most important steps in USDA home loan approval are going to be property and buyer eligibility. If the property is not in an eligible area there is no sense in moving forward. That’s why it’s critical to check the USDA website for single family property eligibility first. Once that has been determined then it’s important to make sure the household income is not over the USDA income limit for the area. Both of those functions can be performed by visiting the USDA website.
Once these two eligibility requirements have been confirmed then it’s time to speak with the mortgage professional at a USDA approved lender. The USDA website also contains a list of approved USDA lenders. If you are already working with a mortgage loan officer they will know whether or a not they offer the USDA home loan programs.
All in all the process from the buyer’s side is not much different than any loan process. The mortgage professional will guide the buyer through the process. All of this information and more can be verified at the USDA home loan website.